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Trust-Based Trade

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Author Info
Luis Araujo
Emanuel Ornelas

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Abstract

Weak enforcement of international contracts can substantially reduce international trade. Wedevelop a model where agents build reputations to overcome the difficulties that thisinstitutional failure causes in a context of incomplete information. The model describes the interplay between institutional quality, reputations and the dynamics of international trade.We find that the conditional probability that a firm will stop exporting decreases and itsforeign sales increase as the firm acquires greater export experience. The reason is that theinformational costs that an exporter faces fall as the exporter becomes more confident about the reliability of its distributor. An improvement in the institutional quality of a country affects its imports through several distinct channels, as it changes the incentives of bothcurrent and potential exporters. Trade liberalization induces current exporters to increase their sales. It could induce entry as well, but this will happen only when the initial tariff is high and/or the institutional quality of the country is low.

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Publisher Info
Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0820.

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Date of creation: Aug 2007
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Handle: RePEc:cep:cepdps:dp0820

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Related research
Keywords: International trade; Export dynamics; Contract enforcement;

Other versions of this item:

Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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References listed on IDEAS
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  1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier. [Downloadable!] (restricted)
    Other versions:
  2. repec:bep:eapcon:v:5:y:2006:i:1:p:1574-1574 is not listed on IDEAS
  3. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Dani Rodrik, 2000. "How Far Will International Economic Integration Go?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 177-186, Winter. [Downloadable!] (restricted)
  6. Chisik, Richard, 2003. "Export industry policy and reputational comparative advantage," Journal of International Economics, Elsevier, vol. 59(2), pages 423-451, March. [Downloadable!] (restricted)
    Other versions:
  7. Bernard, Andrew & Jensen, J Bradford & Redding, Stephen J & Schott, Peter, 2007. "Firms in International Trade," CEPR Discussion Papers 6277, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Ghosh, Parikshit & Ray, Debraj, 1996. "Cooperation in Community Interaction without Information Flows," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 491-519, July. [Downloadable!] (restricted)
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  9. Watson, Joel, 2002. "Starting Small and Commitment," Games and Economic Behavior, Elsevier, vol. 38(1), pages 176-199, January. [Downloadable!] (restricted)
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  10. McLaren, John, 1999. "Supplier relations and the market context: A theory of handshakes," Journal of International Economics, Elsevier, vol. 48(1), pages 121-138, June. [Downloadable!] (restricted)
  11. Overman, Henry G. & Rice, Patricia & Venables, Anthony J., 2008. "Economic Linkages Across Space," CEPR Discussion Papers 6786, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June. [Downloadable!] (restricted)
  13. Alejandro Izquierdo & Jacques Morriset & Marcelo Olarreaga, 2003. "Information Diffusion in International Markets," RES Working Papers 4335, Inter-American Development Bank, Research Department. [Downloadable!]
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  14. Alejandro Cuñat & Marc J. Melitz, 2007. "Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage," NBER Working Papers 13062, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships And Informal Credit In Vietnam," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1285-1320, November. [Downloadable!] (restricted)
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  16. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
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  17. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December. [Downloadable!] (restricted)
  18. Choi, E Kwan & Harrigan, James, 2004. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  19. Woodruff, Christopher, 1998. "Contract enforcement and trade liberalization in Mexico's footwear industry," World Development, Elsevier, vol. 26(6), pages 979-991, June. [Downloadable!] (restricted)
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  22. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May. [Downloadable!] (restricted)
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  23. Rauch, James E. & Watson, Joel, 2003. "Starting small in an unfamiliar environment," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 1021-1042, September. [Downloadable!] (restricted)
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  24. Egan, Mary Lou & Mody, Ashoka, 1992. "Buyer-seller links in export development," World Development, Elsevier, vol. 20(3), pages 321-334, March. [Downloadable!] (restricted)
  25. repec:rus:hseeco:123708 is not listed on IDEAS
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mélise Jaud & Madina Kukenova & Martin Strieborny, 2009. "Financial dependence and intensive margin of trade," PSE Working Papers 2009-35, PSE (Ecole normale supérieure). [Downloadable!]
  2. Buono, Ines & Fadinger, Harald & Berger, Stefan, 2008. "The Micro Dynamics of Exporting: Evidence from French Firms," MPRA Paper 12940, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Brenton, Paul & Saborowski, Christian & von Uexkull, Erik, 2009. "What explains the low survival rate of developing country export flows ?," Policy Research Working Paper Series 4951, The World Bank. [Downloadable!]
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This page was last updated on 2009-11-18.

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